Head NV Nearly Triples Q3 Profit on Irish Property Sale

Head N.V. reported that net revenues for the third quarter ended September 30 increased by 5% to $122.7 million. Operating profit before restructuring costs increased by $7.6 million to $15.7 million and operating profit after restructuring costs increased by $7.6 million to $15.3 million.

Johan Eliasch, Chairman and CEO, commented:

“The third quarter of 2004 is now the sixth consecutive quarter in which we have reported quarter-on-quarter top line growth and whilst this is in part due to exchange rate movements, we have also seen some positive underlying developments in our divisions.

Our operating results (excluding restructuring costs) have also shown a positive development this year, which is a testament to both the success of our underlying strategy to continue to launch and market innovative, technology driven products and also the success of our restructuring program in keeping our cost base as low and flexible as possible.“

Revenues

                         For the Three Months    For the Nine Months
                          Ended 30 September,           Ended
                                                    30 September,
                             2003        2004        2003       2004
 Product category:
 Winter Sports......... $    60,018  $   68,888  $   82,425  $  98,290
 Racquet Sports........      41,693      39,115     128,805    135,530
 Diving.............         12,847      12,726      51,383     58,607
 Licensing............        2,023       1,931       6,754      7,833
   Total Revenues...... $   116,581  $  122,661  $  269,366  $ 300,261

Winter Sports

Winter Sports revenues for the three months ended September 30, 2004 increased by $8.9 million, or 14.8%, to $68.9 million from $60.0 million in the comparable 2003 period. For the nine months ended September 30, 2004, Winter Sports revenues increased by $15.9 million, or 19.2%, to $98.3 million from $82.4 million in the comparable 2003 period. This increase was due to the strengthening of the euro against the U.S. dollar, higher sales volumes and higher prices for bindings and an improved product mix for skis and ski boots.

Racquet Sports

Racquet Sports revenues for the three months ended September 30, 2004 decreased by $2.6 million, or 6.2%, to $39.1 million from $41.7 million in the comparable 2003 period. This decrease results from lower sales prices for tennis racquets and lower sales volumes for tennis balls, partially offset by the strengthening of the euro against the U.S. dollar. For the nine months ended September 30, 2004, Racquet Sports revenues increased by $6.7 million, or 5.2%, to $135.5 million from $128.8 million in the comparable 2003 period. This mainly resulted from improved sales volumes in tennis racquets and the strengthening of the euro against the U.S. dollar.

Diving

Diving revenues for the three months ended September 30, 2004 decreased by $0.1 million, or 0.9%, to $12.7 million from $12.8 million in the comparable 2003 period. For the nine months ended September 30, 2004, Diving product revenues increased by $7.2 million, or 14.1%, to $58.6 million from $51.4 million in the comparable 2003 period. This results mainly from increased sales volumes due to better product availability and the strengthening of the euro against the U.S. dollar.

Licensing

Licensing revenues for the three months ended September 30, 2004 decreased by $0.1 million, or 4.5%, to $1.9 million from $2.0 million in the comparable 2003 period. This decrease is due to timing differences. For the nine months ended September 30, 2004, licensing revenues increased by $1.1 million, or 16.0%, to $7.8 million from $6.8 million in the comparable 2003 period due to increased revenues from existing contracts and from new licensing agreements.

For the three months ended September 30, 2004, gross profit increased by $2.7 million, or 5.9%, to $48.8 million from $46.0 million in the comparable 2003 period. Gross margin increased to 39.7% in this period from 39.5% in the comparable 2003 period. For the nine months ended September 30, 2004, gross profit increased by $16.7 million, or 16.5%, to $118.3 million from $101.5 million in the comparable 2003 period. Gross margin increased to 39.4% in this period from 37.7% in the comparable 2003 period due to improved operating performance and product mix sales.

For the three months ended September 30, 2004, selling and marketing expenses increased by $1.5 million, or 5.5%, to $29.5 million from $28.0 million in the comparable 2003 period. For the nine months ended September 30, 2004, selling and marketing expenses increased by $5.3 million, or 6.5%, to $88.0 million from $82.6 million in the comparable 2003 period. The increase was due to the strengthening of the euro against the U.S. dollar, which adversely impacted our predominantly euro denominated costs.

For the three months ended September 30, 2004, general and administrative expenses decreased by $6.4 million, or 65.8%, to $3.4 million from $9.8 million in the comparable 2003 period. For the nine months ended September 30, 2004, general and administrative expenses decreased by $3.5 million, or 12.7%, to $24.3 million from $27.8 million in the comparable 2003 period. The decrease was due to the gain on the sale of the property in Mullingar, Ireland of $5.6 million partially offset by the strengthening of the euro against the U.S. dollar, which adversely impacted our predominantly euro denominated costs and increased administrative costs.

We also recorded a non-cash compensation expense of $0.1 million and $0.2 million for the three months ended September 30, 2004 and 2003, respectively, and $0.4 million and $0.5 million for the nine months ended September 30, 2004 and 2003, respectively, due to the grant of stock options under our stock option plans of 1998 and 2001 and the resulting amortization expense.

In addition, in the nine months ended September 30, 2004 we recorded restructuring costs of $1.7 million consisting of dismissal and transfer costs in connection with the closing of our production facility in Mullingar, Ireland and our plant in Tallinn, Estonia. In comparison, in the nine months ended September 30, 2003 we incurred restructuring costs of $0.9 million consisting of severance payments, stay bonuses and excess rent due to the movement of our US winter sports organization to our US headquarters.

As a result of the foregoing factors, operating income for the three months ended September 30, 2004 increased by $7.6 million to $15.3 million from $7.7 million in the comparable 2003 period. For the nine months ended September 30, 2004, an operating income of $3.9 million was generated compared to an operating loss of $10.3 million in the comparable 2003 period, an improvement of $14.2 million.

For the three months ended September 30, 2004, interest expense increased by $0.8 million, or 21.8%, to $4.2 million from $3.4 million in the comparable 2003 period. This increase is due to the higher amount of debt (denominated in euro) of our newly issued 8.5% senior notes, further adversely impacted by the strength of the euro against the U.S. dollar, partially offset by reduced interest expense of short-term borrowings. For the nine months ended September 30, 2004, interest expense increased by $11.2 million, or 109.2%, to $21.4 million from $10.2 million in the comparable 2003 period. This increase was mainly due to the following: write-off of the capitalized debt issuance costs of $3.2 million relating to our former 10.75% senior notes, which were repaid with proceeds from our new 8.5% senior notes in January 2004; the premium of $4.4 million for the early redemption of the 10,75% senior notes; the higher interest expenses due to higher debt of the group. The strength of the euro against the U.S. dollar further impacted these predominantly in euro denominated expenses.

For the three months ended September 30, 2004, interest income increased by $0.2 million, or 90.6%, to $0.3 million from $0.2 million in the comparable 2003 period. For the nine months ended September 30, 2004, interest income increased by $0.6 million, or 77.8%, to $1.3 million from $0.7 million in the comparable 2003 period. This increase was due to higher cash on hand as well as due to the strengthening of the euro against the U.S. dollar.

For the three months ended September 30, 2004, we had a foreign currency exchange loss of $0.2 million, compared to $0.5 million in the comparable 2003 period. For the nine months ended September 30, 2004, the foreign currency exchange gain was $0.3 million compared to a loss of $0.2 million in the comparable 2003 period.

For the three months ended September 30, 2004, other expense, net decreased by $0.1 million to $0.01 million from $0.1 million in the comparable 2003 period. For the nine months ended September 30, 2004, other income (expense), net increased by $0.1 million to other income, net of $0.01 million from other expense, net of $0.1 million in the comparable 2003 period.

For the three months ended September 30, 2004, income tax expense was $3.1 million compared to $1.7 million in the comparable 2003 period. For the nine months ended September 30, 2004, income tax expense was $21.1 million compared to an income tax benefit of $3.4 million for the comparable 2003 period. This increase in income tax expense is mainly due to a reduction in Austrian tax rate which led to a decrease in deferred tax asset resulting from tax losses carried forward of $24.9 million.

As a result of the foregoing factors, for the three months ended September 30, 2004, net income increased to $8.1 million compared to a net income of $2.2 million in the comparable 2003 period. For the nine months ended September 30, 2004, the net loss increased to $37.0 million from $16.6 million in the comparable 2003 period.

2004 Outlook

In terms of outlook for 2004 we retain our previous guidance that we expect 2004's reported revenues and operating profits, excluding one-time charges, to be ahead of 2003's.

Although we have seen some signs of improvement in both the general global economic situation and the sporting goods equipment market, the Racquet Sports and Diving markets still remain largely flat on a global basis. Bookings data for Winter Sports is positive but as any re-orders at the end of the year will be dependant on the snow conditions, we remain cautious on our outlook for the winter season. The continuing unrest in the Middle East and expansion in China are affecting oil and steel prices and will impact our raw material prices and therefore our margins in the future. In addition the costs of compliance with the Sarbanes-Oxley Act will also impact our operating result, and in light of these costs we are preparing a cost benefit analysis of our listing in the US.

We have now almost completed our restructuring program. The benefits from this have begun to impact the P&L this year although the full effects will not flow through until 2005/2006 when we will also see additional costs offsetting these savings in the form of raw material price increases.

Finally, due to a reduction in the Austrian income tax rate from 34% to 25% we released a proportion of our capitalised tax losses through the income tax line of our profit & loss account during Q2. Whilst this will affect our profit and loss tax charge, it will not impact cashflow.

Consolidated Results

                            For the Three Months  For the Nine Months
                            Ended 30 September,   Ended 30 September,
                                2003      2004       2003       2004
 REVENUES
 Total                      $  116,581 $ 122,661 $  269,366 $  300,261
 revenues...............
 Cost of                        70,532    73,908    167,838    181,994
 sales..................
    Gross                       46,049    48,753    101,528    118,267
 profit.................
    Gross                        39.5%     39.7%      37.7%      39.4%
 margin................
 Selling & marketing            27,975    29,512     82,630     87,971
 expense........
 General & administrative
 expense (excl. non-cash         9,792     3,386     27,790     24,289
 compensation expense).....
 Non-cash compensation             164       139        491        416
 expense......
 Restructuring                     390       419        875      1,671
 costs.............
    Operating profit             7,729    15,297   (10,258)      3,921
 (loss)...........
 Interest                      (3,444)   (4,193)   (10,241)   (21,426)
 expense............
 Interest                          173       330        731      1,300
 income..............
 Foreign exchange gain           (478)     (167)      (165)        300
 (loss).........
 Other income (expense),          (97)      (16)      (115)         18
 net........
    Income (loss) from
 operations before income        3,883    11,252   (20,048)   (15,887)
 taxes...............
 Income tax benefit            (1,703)   (3,142)      3,441   (21,131)
 (expense)........
    Net income              $    2,180 $   8,110 $ (16,607) $ (37,019)
 (loss)............